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MONEY COMMENT
Lie And You Could Lose Your Home!

By Cliff D'Arcy
October 29, 2003

I'm looking forward to watching The Money Programme tonight at 7.30pm on BBC2. This week's episode alleges that mortgage brokers, estate agents and lenders have been encouraging homebuyers to lie about their earnings in order to obtain larger home loans. D'oh!

Earlier this week, Birmingham Midshires, which is owned by Britain's largest mortgage lender HBOS (LSE: HBOS), suspended three mortgage advisers while it looks into accusations that homebuyers had been persuaded to inflate their earnings on mortgage applications. HBOS has also temporarily stopped selling self-certification home loans, where borrowers don't have to provide proof of their earnings. These loans are usually aimed at the self-employed and contract workers.

These are desperate times for many prospective homebuyers, especially first-time buyers, many of whom are struggling to raise enough money to jump on the property ladder. However, one of the worst things you could do is to exaggerate your income in order to get a bigger loan.

Firstly, you are committing a serious criminal offence - fraud - by 'attempting to obtain financial advantage by deception'. If your lie ever came to light, you could be prosecuted and receive a prison sentence - even for a first offence.

Secondly, you could face financial ruin if your monthly mortgage repayments become a strain. Unless you have a Masters in Budgeting degree, spending more than two-fifths (40%) of your take-home pay on your home loan will usually leave you desperately short of money at the end of each month. Naturally, if you can't keep up your side of the bargain, your mortgage lender may be forced to repossess your home and, possibly, sell it at a loss...

If this all sounds familiar, that's probably because similar allegations emerged during the property madness of the late Eighties. When the last property bubble burst, hundreds of thousands of people lost their homes - just take a look at these repossession figures:

Year   Homes repossessed
1991   75,540
1992   68,540
1993   58,540
1994   49,210
1995   49,410

By way of comparison, in 2002, less than 12,000 homes were repossessed.

So, if you want to sleep easy at night, make sure you don't borrow more than you can comfortably afford. Think about what might happen when interest rates start to rise and always remember: Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.

As for the missus and me, the annual interest on our mortgage, which is small by London standards, comes to just a twentieth (5%) of our annual income. Sadly, this easy living won't last for much longer as, thanks to our growing family, our next mortgage might be three times larger!

More: Mortgage Centre | Good, Bad And Ugly Mortgages | How To Choose A Mortgage.

The author owns shares in HBOS.